How do I Define Tax Rates per Product? (tax rules)
Magento allows full control over Tax Rates, from a single country-wide rate, to rates per state or ZIP code. To define tax rates go to Sales -> Tax -> Manage Tax Rates and select Add New Tax Rate.
Every rate requires you to select the Country for which the rate is valid. If a customer selects that Country for their shipping address the tax rate is calculated. In this case we will select United States.
You can select a state from the next dropdown, if your country has different tax rates for different states, or leave it as all states by keeping * as the value. Our store is in California, so we are going to choose that. Currently only certain countries come with states loaded in this dropdown. Others can only be divided into Zip codes.
It is not require to specify a ZIP code, but if you need to set up different rates for each ZIP in a state or country, this will allow you to do so. Leave the * to apply this rate to all Zips within the designated country/state.
We then have 5 different rates for this location. Examples of the need for different rates for the same location include having different rates for different products (Wine and Glasses for instance), or more likely, different customer types. Many states charge sales tax for retail orders but allow wholesale orders to be exempt.
So we are going to set up a two rates for our theoretical store in California. One rate for retail customers and another for wholesale customers, leaving us with this:
Select Save Rate and you are ready to move to the next step of setting up the taxes in your store, Creating Tax Classes for Customers and Products.